Author: J.D. Roth / Source: Get Rich Slowly
The July 2018 issue of the AAII Journal — the monthly publication of the American Association of Individual Investors — includes an intersting article about how to “increase your retirement resources”. This plain English piece summarizes some of the findings from the authors’ research paper “The Power of Working Longer“.
According to the article, there are three primary factors that determine “the adequacy of retirement resources”.
Those are:- When a person begins participating in an employer-sponsored saving plan,
- What percentage of their earnings they save in such a plan (i.e., their saving rate), and
- At what age they retire and begin taking Social Security benefits.
Until Elon Musk invents a time submarine, it’s impossible for a worker to go back to their youth and begin saving for retirement earlier. Because of this, the authors focused their research on the relative power of saving more and working longer.
Note: To simplify matters, the authors make some assumptions. For instance, instead of investing in the highly-variable stock market, they assume their hypothetical subjects invest in a vehicle with a fixed rate of return: an annuity. This is a little goofy, but helps them come up with more precise numbers than they’d otherwise be able to achieve. Just keep this in mind as we talk about the article’s conclusions.
The Power of Working Longer
First, the authors look at what happens when a person decides to delay retirement by a year — or more. Generally speaking, each extra year worked brings roughly a 7.5% increase to standard of living during retirement. And that’s assuming a real (inflation-adjusted) investment return of 0%!
When you consider that stocks produce a long-term annual real return of about 6.8%, working an extra year has an even greater impact on standard of living in retirement.
Here’s a table from the article that shows the potential increases in standard of living that come from delaying retirement. (All of these numbers assume 0% real returns.)
As you an see, if a 62-year-old opted to work an additional three years instead of retire, they’d enjoy an increased standard of living of nearly 24%. Working longer is a powerful way to increase your “retirement resources”.
The authors’ research found that while investment returns do have an effect on retirement standard of living, they’re not nearly as large as the effect of working longer. Assuming 0% real returns on investments, delaying retirement age from 66 to 67 leads to a 7.75%…
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